Detailed Rationale

CRISIL Ratings has revoked the suspension of its ratings on the bank facilities of Premier Energies Limited (PEL) on Sept 16, 2016 and has presently assigned its 'CRISIL BBB+/Positive/CRISIL A2’ ratings to the bank facilities of PEL. (PEL).

 

The ratings reflect the healthy business risk profile of PEL supported by its established market position in the domestic solar module manufacturing industry, the extensive experience of its promoter and robust demand scenario supported by the government thrust on capacity addition and favourable policies in the form of approved list of module manufacturers (ALMM), basic customs duty (BCD) and product-linked incentive (PLI) scheme.

 

The positive outlook reflects the expectation of ramp-up in the business volumes and profitability post stabilisation of the recently commissioned capacity, also supported by the robust order book position providing revenue visibility for the next 12-15 months.

 

The above strengths are partially offset by the project stabilisation risk for the recently commissioned capital expenditure (capex), moderate project execution risk for the planned capex resulting in a substantial rise in leverage levels, and exposure to intense competition.

Analytical Approach

CRISIL Ratings has combined the financial and business risk profiles of PEL and its subsidiaries as there is operational and financial fungibility between these entities.

 

CRISIL Ratings has treated the compulsory convertible debentures from the private equity investor-GEF Capital Partners as quasi equity instrument as the same is subordinated to senior debt, expected to remain in the system over the medium term and there is no coupon outflow expected against the same.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market presence with long-standing experience of the promoter in the solar industry:

The over 25 years of experience of the promoter in the solar industry and strong relationship with stakeholders across the industry should continue to support the business.  The group is one of the largest integrated (solar cell and module) manufacturing facilities (capacity-wise) in India and enjoys a 12% capacity share in the current installed capacity of 1.25 GW of modules. With another expansion plan in place, the total module manufacturing capacity of the company is likely to reach 2.0 GW and the cell capacity to 2.128 GW by the end of fiscal 2023.

 

While the group had a small module manufacturing line of 3MW in 1995, its projects ranged from installing solar lanterns, village electrifications to export of solar modules. The group also forayed into the solar engineering procurement and construction (EPC) segment in 2011, however, currently they intend to focus on the module and cell manufacturing business.

 

• Favourable demand outlook for solar industry:

Amid growing emphasis for solar power in India, the company fits well to absorb the demand arising from the long-term plans of the government to increase generation capacity from renewable sources. The introduction of protectionist measures by the government such as BCD: 40% and 25% on imported solar modules and solar cells, respectively, from April 2022 and implementation of ALMM coupled with incentivising the domestic manufacturers under the PLI scheme increase the cost competitiveness of domestic modules vis-à-vis that of imported ones. In addition, government approved schemes such as Kisan Urja Surksha Utthan Mahaabhiyan, Central Public Sector Undertaking (CPSU), and The New Rooftop are expected to further provide orders to domestic cell and module manufacturers.

 

• Recently commissioned capex expected to stabilise in the near-term:

In July 2021, the company commissioned a 750 MW module and cell manufacturing line, which currently is in the stabilisation phase. It is expected that these facilities will start operating at optimum utilisation levels from February-March 2022, which along with heathy order book is expected to substantially improve the revenue profile of the company. The capacity will also allow the company to service the demand for Mono-PERC (Passivated Emitter and Rear Cell)/Bifacial technology which along with the economies of scale is also expected to drive improvement in the operating margin over the medium term.

 

• Healthy order book providing revenue visibility:

The group currently has a cumulative order book of ~1,200 MW (~Rs 2,300 crore) for modules and cells (from various reputed customers such as O2 Power and Tata Power Solar (CRISIL AA/Stable/A1+)), which will be executed over the next 12-15 months providing healthy revenue visibility. This is expected to result in revenues increasing to ~Rs. 1,200-1,300 crore in fiscal 2022.

 

Weaknesses:

• Susceptibility to intense competition, regulatory changes and raw material prices:

The company is exposed to intense competition given the large capacity additions being planned in the domestic market with various levels of integration. The implementation of BCD will make Indian players cost-competitive, compared with their Chinese counterparts, however, the risk of significant reduction in selling prices by Chinese players to lessen the impact of BCD persists. Also, growth is vulnerable to changes in government policies and regulations, as it can impact demand.

 

Silicon wafer, the main input in the manufacture of cells, is primarily imported from China. Prices of key inputs such as polysilicon, aluminium and copper have risen sharply in recent months and are likely to remain stable in the near term. Though the company has price-variation clauses for majority of the raw materials and undertakes order-backed procurement to mitigate this risk, any sharp rise in input cost will need to be managed effectively.

 

Domestic players have significant capacity additions planned over the medium term, which can further intensify the competitive landscape of the industry.

 

• Exposure to project execution risk:

PEL is currently increasing its capacity by adding 750 MW module and 1378 MW of cell manufacturing line or an optimal combination within the same range via one of its subsidiaries, at a total cash outlay of Rs 720-750 crore. Equity of Rs 177 crore has already been infused by GEF Capital Partners and financial closure is expected next month and the project is likely to commence operations by the fourth quarter of fiscal 2023. While this exposes the company to project execution risk, CRISIL Ratings draws comfort from the track record of the company with the recently commissioned capacity, however, timely completion of new project and commensurate ramp-up will remain a key monitorable.

 

• Moderate capitalisation and debt coverage indicators:

The capital structure of the company is likely to remain moderately leveraged because of the ongoing debt-funded capex. While the leverage levels will increase in the interim, CRISIL Ratings believes that the offtake risk for the company may remain low considering the strong focus of the government on solar segment and price benefits available with protectionist measures in place. However, the ability of the company to scale-up operations post the completion of ongoing capacity expansion and improve its leverage and coverage metrics remain a key monitorable.

 

While the gearing levels for the company may increase to ~ 1.5 times in fiscal 2023, due to the debt-funded capex, interest coverage may hover at ~ 2.5-3.0 times in the near-to-medium term. In a pure play module manufacturer, the working capital intensity is expected to remain stable with receivables of ~30-45 days, inventory at 30-40 days and a supplier credit period of 70-80 days.

Liquidity: Adequate

Cumulative Net cash accrual of ~Rs 170 crore during fiscals 2022 and 2023, will sufficiently cover the principal debt repayments of ~Rs 50 crore. Bank limit utilisation (fund-based limit) averaged 70% during the 12 months through September 2021, while the current ratio was adequate at 1.3 times as on March 31, 2021, ensuring adequate cushion in the working capital limit. Enhancement in the working capital limit is in the pipeline, and once sanctioned, will cushion liquidity amid growing scale of operations.

Outlook: Positive

The company will continue to benefit from its established market position and the extensive experience of its promoter in the solar module manufacturing business. The positive outlook reflects the expectation of ramp-up in the business volumes and margins with the recently commissioned capacity stabilising, also supported by the robust order book position.

Rating Sensitivity factors

Upward factors:

• Healthy ramp-up of commissioned capacity with the company achieving revenues of  Rs 1,300-1,400 crore on a sustained basis, while maintaining healthy profitability
• Improvement in debt coverage indicators on the back of better accruals and/or faster-than-expected debt reduction

 
Downward factors:

• Slow ramp-up in business operations coupled with profitability levels at 7-8% on a sustained basis
• Substantial delays in project execution resulting in time and cost overruns
• Significant stretch in working capital intensity leading to higher reliance on borrowings

About the Company

PEL, founded in 1995 by Mr Surender Pal Singh, is one of the largest integrated (solar cell and module) manufacturing facility (capacity wise). Its facility at Sangareddy district near Hyderabad has a total annual module production capacity of 1,250 MW and solar cell manufacturing line of 750 MW capacity. The company is in the midst of capacity expansion plans currently, which will enhance the module capacity to 2.0 GW and cell capacity to 2.128 GW.

Key Financial Indicators

As on / for the period ended March 31		2021*	2020
Operating income	Rs crore	688	651
Reported profit after tax	Rs crore	46	26
PAT margin	%	6.71	4.14
Adjusted debt/Adjusted networth	Times	0.35	0.37
Interest coverage	Times	5.15	3.79

*provisional unaudited

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating Assigned With Outlook
NA	Bank Guarantee&	NA	NA	NA	9	NA	CRISIL A2
NA	Bank Guarantee^	NA	NA	NA	8	NA	CRISIL A2
NA	Bank Guarantee%	NA	NA	NA	33	NA	CRISIL A2
NA	Cash Credit	NA	NA	NA	4	NA	CRISIL BBB+/Positive
NA	Cash Credit	NA	NA	NA	3	NA	CRISIL BBB+/Positive
NA	Cash Credit	NA	NA	NA	3	NA	CRISIL BBB+/Positive
NA	Cash Credit	NA	NA	NA	9	NA	CRISIL BBB+/Positive
NA	Cash Credit$	NA	NA	NA	3	NA	CRISIL BBB+/Positive
NA	Foreign Exchange Forward	NA	NA	NA	3.5	NA	CRISIL A2
NA	Letter of Credit	NA	NA	NA	21.25	NA	CRISIL A2
NA	Letter of Credit#	NA	NA	NA	9	NA	CRISIL A2
NA	Letter of Credit@	NA	NA	NA	8	NA	CRISIL A2
NA	Letter of Credit	NA	NA	NA	33	NA	CRISIL A2
NA	Letter of Credit!	NA	NA	NA	15	NA	CRISIL A2
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	10.25	NA	CRISIL BBB+/Positive
NA	Standby Letter of Credit~	NA	NA	NA	8	NA	CRISIL A2

& - Interchangeable with BG (FBG) of Rs. 9.00 crore

^ - Interchangeable with SBLC of Rs. 8.00 crore

% - Interchangeable with BG (FBG) of Rs. 33.00 crore

$ - Interchangeable with WCDL of Rs. 3.00 crore

# - Interchangeable with LC (ILC) of Rs. 9.00 crore

@ - Interchangeable with LC (FLC) of Rs. 8.00 crore and SBLC of Rs. 8.00 crore

! - Interchangeable with Bank guarantee of Rs. 15.00 crore

~ - Interchangeable with LC (FLC) and SBLC of Rs. 33.00 crore

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Premier Energies Ltd	Full	Wholly-owned subsidiary
Premier Energies Photovoltaic Pvt Ltd		Wholly-owned subsidiary
Premier Solar Powertech Pvt Ltd		Subsidiary
Premier Energies Global Environment Pvt Ltd		Wholly-owned subsidiary